Abstract
Although accounting-based numbers will tend to generate misleading noise, for the purpose of investment that noise is certainly not the sole reason for the lack of alpha in traditional active fund management. Investing by numbers is not the favorite technique of investors. The framework of an economic model reduces the possibilities of speculation to a minimum and frames investment analysis within a narrow field. An economic model will characterize a company, any company except financial groups, with three endogenous and two exogenous variables: an amount of invested capital, a real growth rate, and a real cash return associated with this capital, complemented by an ambient expected return (cost of capital) and a market price. This chapter deals primarily with the three endogenous variables whose study is called “fundamental analyses.” The price of an asset is the result of an immensely complex process, which includes a good dose of randomness and behavioral patterns impossible to model.
Published Version
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